Social Aspects of Economic Crises Precursors and Consequences

1. Social Aspects of Economic CrisesPrecursors and Consequences Thorvaldur Gylfason Presentation at 34th Arne Ryde Symposium in honor of Prof. Lars Jonung,Lund University, 3 October 2014.

2. Overview • Social capital as a source of growth • Frayed social capital as a precursor as well as consequence of slow growth and of economic crises • From inequality via crises to broken trust • Social and economic indicators side by side (Deaton, 2013) • Inequality and crises, 1920-1929 and 1990-2008 • Inequality and trust in Sweden vs. US and Iceland • Nordic countries: Big divergence since 2000 • Gathering clouds • Broken trust undermines economic performance • Uncertain prospects for reform and restoration of trust, prosperity, and growth

3. From inequality to instability • Increased inequality appears to breed, or at least precede, financial crises • Roaring 1920s preceded Great Depression • Galbraith’s The Great Crash 1929 (1988) • Financial deregulation with attendant rise of the 1% (and 0.1%) preceded fall of Lehman Brothers • Galbraith’s Inequality and Instability (2012) • Ratio of US executive salaries to ordinary salaries rose from 30 in 1960s to 270 in 2008 (Economic Policy Institute, 2011) • Piketty’sCapital (2014) covers both episodes, and more • Share of top 10% in US national income rose from 40% to 50% from 1920 to 1929 and again from 1990 to 2008 compared with 20% in Scandinavia and 25% in rest of Europe

4. Iceland fits the pattern Iceland: Inequality of disposable income 1993-2009 • Deregulation without markedly increased inequality preceded Nordic financial crisis of 1989-1994 (Jonunget al., 2009) • Denmark escaped crisis • Like Finland, Norway, and Sweden, Iceland also had its financial crisis, but it was covered up, paving the way off the cliff in 2008 • Increased inequality after 1995 was also covered up Red bars: Gini index for total income, including capital gains Grey bars: Gini index excluding capital gains Unprecedented increase in inequality Source: Internal Revenue Directorate, http://www.rsk.is/.

5. Share of top 1% in total income (%) “American enterprise in the twenties had opened its hospitable arms to an exceptional numbers of promoters, grafters, swindlers, impostors, and frauds.” Galbraith (1988) United States Sweden Galbraith (1988) on media Rajan (2011) and Galbraith (2012) on debt Did increased inequality cause financial crash or were both consequences of recklessness? Source: Piketty (2014).

6. Share of top 0.1% in total income (%) United States Sweden Source: Piketty (2014).

7. Iceland: Share of top 10% and top 1% in total disposable income (%) Top 10% Top 1% Government followed an aggressive policy of shifting the tax burden from the rich to the rest From 1995 on, Iceland shared with US in the 1920s and 1990-2008 a marked increase in inequality Source: Internal Revenue Directorate, http://www.rsk.is/.

8. Per capita income and hours of work(GNI in current international $, ppp) GNI per capita 1980-2012 Hours per employee 1950-2012 Norway left others behind before 2000 More leisure, less work everywhere Iceland parted company in 2008 Source: World Bank World Development Indicators and The Conference Board Total Economy Database™, January 2013, http://www.conference-board.org/data/economydatabase/.

9. Income per hour and hours of work(GNI in current international $, ppp) Hours per person 1990-2012 GNI per hour of work 1990-2012 More hours reflect less efficiency and, fewer hours, perhaps, more fun (Denmark) Iceland began its relative descent before 2000 Source: The Conference Board Total Economy Database™, January 2013, http://www.conference-board.org/data/economydatabase/ and author’s computations based on preceding charts.

10. Unemployment and inflation(in %) Unemployment 1980-2012 Inflation 1961-2012 Finland and Norway stand out Iceland stands out; 99.95% Source: World Bank World Development Indicators.

11. Gross capital formation(% of GDP, % of GNI) Iceland: Collapse of net investment(% of GDP) Gross capital formation 1965-2012 Adjusted net saving 2005-2012 Adjusted net saving reflects the real difference between production and consumption by adjusting net saving for changes in human capital (measured by spending on education and innovation) and depreciation or depletion of natural resources Source: World Bank World Development Indicators.

12. Longevity and fertility(1960-2012) Life expectancy (years) Fertility (births per woman) No sign that crises put a dent in longevity Weak sign that crisis has reduced fertility in Iceland Source: World Bank World Development Indicators.

13. Corruption 2012 Business corruption Political corruption Percentage of respondents saying corruption is widespread in government Here Iceland is a next-door neighbor to Russia and Ukraine Lower index reflects more corruption Source: Gallup, http://www.gallup.com/poll/165476/government-corruption-viewed-pervasive-worldwide.aspx. Source: Transparency International.

14. Interpersonal trust and trust in institutions Trust in other people Iceland: Trust in institutions 2013 TRUST INDEX = 100 + (% Most people can be trusted) - (% Can’t be too careful) Bowling Alone: US figure is 72.9 % expressing a lot of trust in institutions Source: World Values Survey. Source: Capacent.

15. Sweden and US: Trust in institutions(% answering Yes to “Do you have a great deal or quite a lot of confidence in the courts, etc.”?) Sweden beats the US every time, with one exception Source: World Values Survey.

16. Discussion • Financial crises can, in part, be traced to weaker social cohesion, with long-lasting economic effects threatening to further weaken social capital by undermining trust, boosting chauvinism, etc. • No prosecutions of bank CEOs in US • James Galbraith and Bill Black are severely critical of this • Citing FBI, Black insists that all major US banks broke laws • Some banks have paid fines, their CEOs unpunished • Rise of chauvinism and extremism in Europe • Hungary, Finland, Sweden, Iceland • Weakening of US and Europe plays into Russia’s hand in Ukraine • Iceland’s Parliament is trying to steal the constitution Fini

17. References Deaton, Angus (2013), The Great Escape: Health, Wealth, and the Origins of Inequality, Princeton University Press, Princeton and Oxford. Galbraith, James K. (2012), Inequality and Instability: A Study of the World Economy Just Before the Great Crisis, Oxford University Press, Oxford and New York. Galbraith, John Kenneth (1988), The Great Crash 1929, Houghton Mifflin Company, Boston. Jonung, Lars, JaakoKiander, and PenttiVartia (2009), The Great Financial Crisis in Finland and Sweden: The Nordic Experience of Financial Liberalization, Edward Elgar, Cheltenham, UK, and Northampton, MA, USA. Piketty, Thomas (2014), Capital in the Twenty-first Century, Harvard University Press, Cambridge, MA, USA and London, England. Rajan, Raghuram G. (2011), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton University Press, Princeton and Oxford. Reinhart, Carmen M., and Kenneth S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton and Oxford. World Values Survey, Accessed October 1, 2014, http://www.worldvaluessurvey.org/WVSContents.jsp